Three Crises Merge in Cuba’s Economy: Causes & Risks

By Julio Carranza (Progreso Weekly)

HAVANA TIMES – What follows is a text trying to summarize, in a concrete way, the main factors that affect, characterize and challenge the Cuban economy at this time.

Firstly, we must take into account that the economy has been in crisis mode for a long period of time with some intermittent but insufficient recoveries, which began in the 1990s — since the fall of the socialist camp and the disappearance of the USSR, plus the intensification of the U.S. blockade. It all gave rise to the obsolescence of the economic model that, without going into details and nuances now, was essentially inspired by the economies of the socialist countries of Eastern Europe that had been established during the first decades of institutionalization of the revolution, especially in the 70s and 80s. This stage, by the way, corresponded to the period of greatest growth and stability of the economy.

Previously we have tried to make a periodization of this long stage of crisis that has already lasted for more than three decades until reaching this last critical segment that begins in 2020, when the main economic indicators have once again fallen notably and the standard of living of the population has contracted perhaps as in no other previous period, including the special period of the 1990s. In this case with a different generation and under the leadership of a government that, for logical reasons, does not and could not have the influence, the historical authority and the leadership of the then-government.

Factors affecting the current situation:

• The intensification of the U.S. blockade that, after the important but very brief moment of notable improvement in relations with the U.S. during the end of the Barack Obama administration, has reached strong extremes under the delusional administration of Donald Trump and that, so far, has been essentially unchanged during the first two years of Democrat Joe Biden.
• The impact of the global COVID 19 pandemic, which for more than two years has meant the almost total loss of income derived from tourism, and the commitment of important and very scarce resources to face its various internal consequences.

The extraordinary achievement during this period, perhaps the only significant one in this context, was by the Cuban scientific community that quickly and effectively obtained more than one vaccine to guarantee total coverage of the population is remarkable.

• The weight of the external debt, time and time again partially renegotiated with Cuba’s main creditors (including China and Russia, with whom it was possible to suspend the payment of their service until 2027), but which continues to limit the country’s access to credit, trade, and international investment.
• The deterioration of the international situation, impacted by the war in Ukraine, which, in economic terms, is characterized by volatility and uncertainty in the markets, as well as by a strong inflationary process worldwide.
• Finally, an essential factor of an internal nature is the late, slow and not sufficiently integrated economic reform that the national economy should have.

If the combination of the above factors is taken into account, it could be stated that the challenges and pressures have been enormous and the response has not been up to the task and with the certainty and agility required. Although the resistance capacity that the country has shown in the face of difficulties and aggression must be recognized, despite moments of increased social tension.

Three crises at once

Trying to dissect the current situation, it could be said that the national economy faces at least three crises that overlap and reinforce each other in the same time and space:

1. The structural crisis of the economic model:

As we stated earlier, beyond the discussion of whether or not it was the best option, the reality is that for years the Cuban economy established a model for organizing the economy inspired by the socialist economies of Eastern Europe and accompanied by a process of integration in the economic space that they formed with the Council for Mutual Economic Assistance (CAME).

The disappearance of that world and the closure of the economic space that had allowed Cuba to largely overcome the isolation imposed by the U.S. blockade, made evident from very early on in the 90s the need for a fundamental economic reform of the economy, not to abandon its socialist horizon, but to adapt it to the new and difficult international conditions. Contributing and discussing that necessary change is what motivated our book published in Havana in 1995, “Cuba: Restructuring the Economy: A Contribution to the Debate” (Carranza, Gutiérrez and Monreal). However, beyond specific changes, some of them certainly very important, up to now the model of organization of the national economy has not been restructured to the extent needed and with the necessary depth.

After almost two decades of debates and above all the accumulation of evidence, the party congresses discussed and approved documents that opened the political space to advance in the necessary economic reform, mainly “The conceptualization of the economic model,” the “Guidelines” and finally the new Constitution of the Republic approved by the majority vote of the population. However, the measures for change were adopted slowly (if not late) and without sufficient comprehensiveness, which has delayed and continues to delay the articulation of the only strategic solution that, in our opinion, the Cuban socialist economy has in overcoming the immense challenges it faces and the enormous pressures that oppose it.

Essential to the process is the integrating the different economic actors based on their various forms of ownership and management, a deep reform of the state company (leader of the system), reform of the agricultural production subsystem, modification of the relationship between planning and the market, move the economic model towards greater decentralization, construction of markets — including the means of production and monetary markets — with their corresponding regulations, an active monetary, exchange and fiscal policy economically based and rigorously implemented, a focused and effective social policy, an investment policy that respond to national priorities, etc. and everything in the right sequence.

The reform of the state company is a key point. Make changes, both in their internal organization (so that they better express the interests of their owner, which is the people), as well as the ways in which they relate to each other and to the rest of the economic actors, to create the conditions that allow them to raise their efficiency, which today, in general terms, is at clearly low levels.

A more dynamic economy is needed with greater autonomy and in a competitive context and strong financial restrictions. The leadership of the state company in the national economy should not and cannot be established by “decree,” but rather the result of its scale, efficiency and profitability.

The proper operation of the markets, with the necessary regulations, including the money market, is impossible without a reformed state company that allows it to attend to them without causing strong distortions. The markets must integrate all the economic actors (state, cooperative and private, plus foreign investment companies), under the leadership of the state company, which must also respond to a more strategic and financial planning than traditional bureaucratic planning that has affected the socialist economies, the Cuban one included.

The macroeconomic crisis

Second, the precipitated macroeconomic crisis after 2020, with the arrival of the COVID-19 pandemic — in a two year period the economy contracted more than 13%, with a very slight recovery of 1.3% during the last year — imports were drastically and abruptly reduced, with which the scarcity of practically everything invaded the spaces of the national economy, generating multiple difficulties and growing discomfort in the population.

All marketing spaces have been characterized over the last two and a half years by a sustained shortage and permanent queues, more in those that offer products in national currency, but also in those that offer in MLC, the latter more difficult to understand since it is a segment that can finance itself and sustain the flow of foreign exchange that favors the economy. (In this sense, and as several economists have been proposing for some time, a greater liberalization of the wholesale and retail markets has recently been decided, a measure still to be implemented.)

The most evident expression of this dimension of the crisis is the galloping inflation and the monetary chaos that remains and grows in the country as a result of the contraction of the economy and also of the insufficiencies and inaccuracies with which the economic policy has been conducted during the last two and a half years, including how the so-called “monetary order” — started in January 2021 — was conceived and implemented.

We have expanded on the reasons for the impact of this on the growth of inflation in previous articles. The causes of inflation are not only in the economic and monetary policy, without a doubt there are also external factors, but the internal economic policy has fueled it notably.

On the one hand, the multiplication of business costs with the devaluation of the national currency from January 2021, and then, trying to compensate for the rise in prices with an excessive expansion of demand with the increase in various incomes and the distribution of “utilities” without the productive support and precise calculations that allow maintaining macroeconomic balances and keeping the fiscal deficit under control, essential factors for the stability and growth of any economy.

The strong expansion of demand in an economy such as Cuba’s, where the country’s industrial and productive base in general, including agriculture, is so affected, while still tied by clearly unjustified limitations (in addition to pressure from the blockade), makes the response to that monetary expansion not productive but inflationary, it does not exist, so that it can be quickly activated, what Keynesians called “multiplication factor”.

Hence the importance of the underestimated sequentiality and comprehensiveness of the reform. Before multiplying costs and expanding demand, conditions must be created for the recovery of supply via production with adequate progress in the comprehensive economic reform, including the consolidation of the different economic actors, including the emerging private sector of SMEs and cooperatives, as well as and essentially, we insist, the reform of the state company, also with a part of the available foreign exchange dedicated to maintain essential imports, especially medicines, food and certain means of production, even when this implies a reduction in the rate of investment in sectors such as tourism.

In other words, of course, the establishment of an integrated exchange market and monetary order must be a very important component of the reform, but not in any way, with any order, or at any time.

Added to the regulations are the recent measures for the establishment of a market for the purchase and sale of currencies, but it is being carried out again in a partial, limited and disintegrated manner, which has motivated a new spiral of growth in the price of foreign currency in the parallel market, with all its implications, among them the rise of inflation, which mainly affects the lower-income sectors, which in Cuba affects the largest sector of the population.

It should be noted that certain official prices (including fuel and other services and products offered in the state network) have maintained their level anchored in the exchange of 1 USD for 24 CUP, which was established in January 2021. However, due to the new official parallel rate OF 1 USD for 120 CUP, plus the informal one that is already around 150 CUP, it turns out that for holders of foreign currency or MLC (not the majority of the population that only receives national currency and therefore deals with low incomes), these products and services have, via the exchange rate, a comparatively low price (gasoline is a typical case), which causes significant losses to the state. It is the expression of the great distortion of the money market that this process has created.

Monetary policy is a fundamental instrument of economic policy and also of social policy. It cannot be treated simply as a mechanism for “recovery” of foreign currency because these negative distortions are generated. Previously we had stated that the idea of ​​evaluating the possibility of investing a few million dollars to expand and bring the money market under control — of course there is not enough foreign currency — is not a minor matter. It is a fundamental factor in contributing to put the foreign exchange market and inflation under greater control — a fundamental social priority. It might even be possible to obtain international credits for this purpose. It is a subject as complex as it is essential, so a discussion about it with the corresponding specialists, calculating and reviewing the data, would be very convenient.

On the other hand, continuing to seek and apply various ways to alleviate the pressure of the external debt is also a factor of great importance, including the exchange of debt for investment, bond issuance, etc. Without payment guarantees there is no possibility of obtaining the resources that the country needs through credit and investment. This is a critical point.

The country’s economists have talked a lot, and rightly so, about the need for a more balanced investment policy adjusted to national priorities where the agricultural sector stands out for its role in guaranteeing the food security of the population, now notably affected.

According to calculations made by economists, between 2 billion and 2.5 billion dollars of investment per year would be necessary to sustain a GDP growth rate of more than 5% per year. The current level is very far from that figure. This supposes greater incentives and policy updates for foreign investment, including aspects such as direct payment to workers hired by investors, etc. But to return to our essential point, an economic model that works in an integrated and efficient manner is also decisive in this matter, including the existence and functionality of structures such as financial services, insurance, post, connectivity. Do they exist? Yes. Do they work effectively? No.

The sectoral crisis

Added to the two previous dimensions of the crisis is the specific crisis in important sectors of the economy: mainly energy and agriculture.

The former is affected not only by prices and difficulties in accessing fuel, but also, and very importantly, by the lack of sufficient foresight in the maintenance cycles of the country’s main power plants, as well as in fuel tanks, which is the reason for constant breakages and accidents. Are they causes or risks?

Of course, the lack of foreign currency and the blockade limits the proper maintenance and capital repairs, but it is a factor that the economy must have enough time and include in its strategic plans. There is not only an economic problem in this, there is also a national security problem.

It is also worth mentioning here that the insufficient progress in the installation of alternative energy sources that contribute to changing the national energy matrix. Cuba still has an immense space and conditions to advance in this field.

On the other hand, the crisis in the agricultural sector, which despite having benefited from a set of liberalizing measures has not yet had the strategic transformation it needs. That is, as we have stated on other occasions, what is needed is a profound change of the agricultural production subsystem as part of the general and comprehensive reform of the economy. “A group of measures” is not enough, no matter how positive they may be. The incentives, links and forms of management in the entire agricultural sector, from production and distribution to marketing and consumption, must be fully transformed.

The country cannot allow itself to have strong limitations in the supply of food and at the same time idle land and other lands with productivity levels far below those that could be obtained, even taking into account the strong limitations imposed by the blockade.

Mention should also be made here of the deterioration of the traditional sugar sector, whose current production levels are still insufficient even to cover national demand.

Conclusion

It is imperative that the economic strategy and the economic policy respond to these three crises at the same time, with the integrality and the necessary sequence, without the solutions to the emergencies dismantling or hindering the strategic solution that is, I insist, in the integral and deep transformation of the organization of the economic model, preserving its character of justice and social inclusion, complex and difficult, yes, impossible, no. The future of the country is at stake. Time runs fast and is a critical variable.

*Julio Carranza, PhD in Economic Sciences, is considered among the most lucid Cuban specialists.

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